NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
JetBlue predominately provides air transportation services across the United States, the Caribbean and Latin America. Our condensed consolidated financial statements include the accounts of JetBlue Airways Corporation, or JetBlue, and our subsidiaries, collectively referred to as “we” or the “Company”. All majority-owned subsidiaries are consolidated on a line by line basis, with all intercompany transactions and balances having been eliminated. In June 2014, LiveTV, LLC (and LTV Global, Inc, and LiveTV International, Inc., subsidiaries of LiveTV, LLC) were sold to Thales Holding Corporation and ceased to be subsidiaries of JetBlue. Following the close of the sale on June 10, 2014, the transferred LiveTV operations are no longer presented in our condensed consolidated financial statements. Refer to Note 10 for more details on the sale. These condensed consolidated financial statements and related notes should be read in conjunction with our
2013
audited financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2013
, or our
2013
Form 10-K.
These condensed consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the Securities and Exchange Commission, or the SEC. In our opinion they reflect all adjustments, including normal recurring items, that are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted as permitted by such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year.
Investment securities
Investment securities consist of available-for-sale investment securities and held-to-maturity investment securities. When sold, we use a specific identification method to determine the cost of the securities.
Held-to-maturity investment securities.
The contractual maturities of the corporate bonds we held as of
June 30, 2014
were not greater than 24 months. We did
not
record any significant gains or losses on these securities during the
three and six months ended
June 30, 2014
or
2013
. The estimated fair value of these investments approximated their carrying value as of
June 30, 2014
and
December 31, 2013
, respectively.
The carrying values of investment securities consisted of the following at
June 30, 2014
and
December 31, 2013
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
|
(unaudited)
|
|
|
Available-for-sale securities
|
|
|
|
|
Time deposits
|
|
$
|
135
|
|
|
$
|
70
|
|
Commercial papers
|
|
24
|
|
|
118
|
|
|
|
159
|
|
|
188
|
|
Held-to-maturity securities
|
|
|
|
|
Corporate bonds
|
|
$
|
258
|
|
|
$
|
275
|
|
Time deposits
|
|
53
|
|
|
53
|
|
|
|
311
|
|
|
328
|
|
|
|
|
|
|
Total
|
|
$
|
470
|
|
|
$
|
516
|
|
Intangible Assets
Our intangible assets consist primarily of acquired take-off and landing slots, or Slots, at certain domestic airports. Slots are the rights to take-off or land at a specific airport during a specific time period of the day and are a means by which airport capacity and congestion can be managed. We account for Slots at High Density airports, including Ronald Reagan National Airport in Washington, D.C., or Reagan National, LaGuardia Airport, or LaGuardia, and John F. Kennedy International Airport, or JFK, in New York City as indefinite life intangible assets which results in no amortization expense, while Slots at other airports are amortized on a straight-line basis over their expected useful lives, up to
15 years
. As of December 31, 2013, we changed our estimated lives for Slots at High Density Airports from
15 years
to indefinite life. We incurred amortization expense of
$3 million
and
$5 million
related to Slots at High Density Airports for the six months ended June 30, 2013 and the 12 months ended December 31, 2013, respectively.
In March 2014, we completed the purchase of
24
Slots at Reagan National Airport for
$75 million
. We plan to begin using these Slots in the second half of 2014. Consistent with our accounting treatment for Slots at all High Density Airports, we have assigned these assets an indefinite life.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09,
Revenue from Contracts with Customers
, which supersedes existing revenue recognition guidance. Under the new standard a company will recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. The standard is effective for public companies for annual periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted. We are currently evaluating the impact adopting this standard will have on our consolidated financial statements.
NOTE 2 — SHARE-BASED COMPENSATION
During the
six months ended June 30, 2014
,
2.5 million
restricted stock units vested and
1.9 million
restricted stock units were granted under the 2011 Incentive Compensation Plan and the Amended and Restated 2002 Stock Incentive Plan.
NOTE 3 — LONG TERM DEBT, SHORT TERM BORROWINGS, AND CAPITAL LEASE OBLIGATIONS
During the six months ended June 30, 2014, we made scheduled principal payments of
$281 million
on our outstanding long-term debt and capital lease obligations, including the final payment on the Series 2004-1 Enhanced Equipment Trust Certificate, or EETC, of
$188 million
. As a result,
13
aircraft became unencumbered. In June 2014, we used some of the proceeds from the sale of LiveTV and prepaid
$299 million
of floating rate outstanding principal secured by
14
Airbus A320 aircraft that are now unencumbered. In May 2014, we prepaid
$7 million
of outstanding principal relating to
five
previously encumbered spare engines.
In March 2014, we completed a private placement of
$226 million
in pass-through certificates, Series 2013-1. The certificates, which were issued by a pass-through trust, are not obligations of JetBlue. The proceeds from the issuance of the pass-through certificates were used to purchase equipment notes issued by JetBlue and secured by
14
of our previously unencumbered aircraft. Principal and interest are payable semiannually, starting in September 2014.
During the six months ended June 30, 2014, we issued
$81 million
in fixed rate equipment notes due through 2024. These notes are secured by
three
Airbus A321 aircraft that were delivered during the period,
two
of which were financed with capital leases and resulted in
$76 million
of net non-cash financing. We further financed
one
previously unencumbered EMBRAER 190 aircraft.
Aircraft, engines, other equipment and facilities with a net book value of
$3.26 billion
at
June 30, 2014
have been pledged as security under various loan agreements. As of
June 30, 2014
, we owned, free of encumbrance,
34
Airbus A320 aircraft and
35
spare engines. At
June 30, 2014
, the weighted average interest rate of all of our long-term debt and capital lease obligations was
4.8%
and scheduled maturities were
$185 million
for the
remainder of 2014
,
$263 million
in
2015
,
$462 million
in
2016
,
$202 million
in
2017
,
$234 million
in
2018
and
$1.04 billion
thereafter
.
The carrying amounts and estimated fair values of our long-term debt at
June 30, 2014
and
December 31, 2013
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
Public Debt
|
|
|
|
|
|
|
|
|
Floating rate enhanced equipment notes:
|
|
|
|
|
|
|
|
|
Class G-1, due through 2016
|
|
$
|
51
|
|
|
$
|
50
|
|
|
$
|
55
|
|
|
$
|
54
|
|
Class G-2, due 2014 and 2016
|
|
185
|
|
|
180
|
|
|
373
|
|
|
365
|
|
Fixed rate special facility bonds, due through 2036
|
|
77
|
|
|
75
|
|
|
78
|
|
|
68
|
|
6.75% convertible debentures due in 2039
|
|
162
|
|
|
368
|
|
|
162
|
|
|
297
|
|
5.5% convertible debentures due in 2038
|
|
68
|
|
|
167
|
|
|
68
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Non-Public Debt
|
|
|
|
|
|
|
|
|
Fixed rate enhanced equipment notes, due through 2023
|
|
$
|
226
|
|
|
$
|
228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Floating rate equipment notes, due through 2025
|
|
299
|
|
|
304
|
|
|
634
|
|
|
645
|
|
Fixed rate equipment notes, due through 2026
|
|
1,141
|
|
|
1,218
|
|
|
1,110
|
|
|
1,161
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,209
|
|
|
$
|
2,590
|
|
|
$
|
2,480
|
|
|
$
|
2,724
|
|
The estimated fair values of our publicly held long-term debt are classified as Level 2 in the fair value hierarchy. The fair values of our enhanced equipment notes and our special facility bonds were based on quoted market prices in markets with low trading volumes. The fair value of our convertible debentures was based upon other observable market inputs since they are not actively traded. The fair value of our non-public debt was estimated using a discounted cash flow analysis based on our borrowing rates for instruments with similar terms and therefore classified as Level 3 in the fair value hierarchy. The fair values of our other financial instruments approximate their carrying values.
We have financed certain aircraft with EETCs as one of the benefits is being able to finance several aircraft at one time, rather than separately. The structure of EETC financing is that we create pass-through trusts in order to issue pass-through certificates. The proceeds from the issuance of these certificates are then used to purchase equipment notes which are issued by us and are secured by our aircraft. These trusts meet the definition of a variable interest entity, or VIE, as defined in the
Consolidations
topic of the FASB Codification, and must be considered for consolidation in our condensed consolidated financial statements. Our assessment of the EETCs considers both quantitative and qualitative factors including the purpose for which these trusts were established and the nature of the risks in each. The main purpose of the trust structure is to enhance the credit worthiness of our debt obligation through certain bankruptcy protection provisions, liquidity facilities and lower our total borrowing cost. We concluded that we are not the primary beneficiary in these trusts due to our involvement in them being limited to principal and interest payments on the related notes, the trusts were not set up to pass along variability created by credit risk to us and the likelihood of our defaulting on the notes. Therefore, we have not consolidated these trusts in our condensed consolidated financial statements.
NOTE 4 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in fair value of our aircraft fuel derivatives and interest rate swap agreements, which qualify for hedge accounting. A rollforward of the amounts included in the accumulated other comprehensive income (loss), net of taxes for the
three months ended June 30, 2014
and
June 30, 2013
are as follows (in millions, unaudited):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel
Derivatives (1)
|
|
Interest Rate
Swaps (2)
|
|
Total
|
Beginning accumulated losses, at March 31, 2014
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
Reclassifications into earnings (net of $2 of taxes)
|
|
—
|
|
|
1
|
|
|
1
|
|
Change in fair value (net of $2 of taxes)
|
|
5
|
|
|
—
|
|
|
5
|
|
Ending accumulated income, at June 30, 2014
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel
Derivatives (1)
|
|
Interest Rate
Swaps (2)
|
|
Total
|
Beginning accumulated losses at March 31, 2013
|
|
$
|
(3
|
)
|
|
$
|
(5
|
)
|
|
$
|
(8
|
)
|
Reclassifications into earnings (net of $2 of taxes)
|
|
2
|
|
|
1
|
|
|
3
|
|
Change in fair value (net of $(7) of taxes)
|
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
Ending accumulated losses, at June 30, 2013
|
|
$
|
(12
|
)
|
|
$
|
(4
|
)
|
|
$
|
(16
|
)
|
__________________________
|
|
|
|
|
|
|
(1) Reclassified to aircraft fuel expense
|
|
|
|
|
|
|
(2) Reclassified to interest expense
|
|
|
|
|
|
|
A rollforward of the amounts included in the accumulated other comprehensive income (loss), net of taxes for the
six months ended June 30, 2014
and
June 30, 2013
are as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel
Derivatives (1)
|
|
Interest Rate
Swaps (2)
|
|
Total
|
Beginning accumulated income (losses) at December 31, 2013
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Reclassifications into earnings (net of $2 of taxes)
|
|
1
|
|
|
1
|
|
|
2
|
|
Change in fair value (net of $1 of taxes)
|
|
2
|
|
|
—
|
|
|
2
|
|
Ending accumulated income, at June 30, 2014
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel
Derivatives (1)
|
|
Interest Rate
Swaps (2)
|
|
Total
|
Beginning accumulated losses at December 31, 2012
|
|
$
|
(1
|
)
|
|
$
|
(7
|
)
|
|
(8
|
)
|
Reclassifications into earnings (net of $3 of taxes)
|
|
2
|
|
|
3
|
|
|
5
|
|
Change in fair value (net of $(8) of taxes)
|
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
Ending accumulated losses, at June 30, 2013
|
|
$
|
(12
|
)
|
|
$
|
(4
|
)
|
|
(16
|
)
|
__________________________
|
|
|
|
|
|
|
(1) Reclassified to aircraft fuel expense
|
|
|
|
|
|
|
(2) Reclassified to interest expense
|
|
|
|
|
|
|
NOTE 5 — EARNINGS PER SHARE
The following table shows how we computed basic and diluted earnings per common share (in millions, share amounts in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
230
|
|
|
$
|
36
|
|
|
$
|
234
|
|
|
$
|
50
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Interest on convertible debt, net of income taxes and profit sharing
|
|
3
|
|
|
3
|
|
|
5
|
|
|
5
|
|
Net income applicable to common stockholders after assumed conversions for diluted earnings per share
|
|
$
|
233
|
|
|
$
|
39
|
|
|
$
|
239
|
|
|
$
|
55
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
293,511
|
|
|
280,621
|
|
|
294,165
|
|
|
280,194
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
2,004
|
|
|
1,798
|
|
|
2,194
|
|
|
1,730
|
|
Convertible debt
|
|
48,351
|
|
|
60,574
|
|
|
48,351
|
|
|
60,574
|
|
Adjusted weighted average shares outstanding and assumed conversions for diluted earnings per share
|
|
343,866
|
|
|
342,993
|
|
|
344,710
|
|
|
342,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Shares excluded from EPS calculation (in millions):
|
|
|
|
|
|
|
|
|
Shares issuable upon exercise of outstanding stock options or vesting of restricted stock units as assumed exercise would be antidilutive
|
|
9.5
|
|
|
13.5
|
|
|
10.7
|
|
|
15.5
|
|
As of
June 30, 2014
, a total of approximately
1.4 million
shares of our common stock, which were lent to our share borrower pursuant to the terms of our share lending agreement as described more fully in Note 2 to our 2013 Form 10-K, were issued and outstanding for corporate law purposes. Holders of the borrowed shares have all the rights of a holder of our common stock. However, because the share borrower must return all borrowed shares to us (or identical shares or, in certain circumstances of default by the counterparty, the cash value thereof), the borrowed shares are not considered outstanding for the purpose of computing and reporting basic or diluted earnings per share. The fair value of similar common shares not subject to our share lending arrangement, based upon our closing stock price at
June 30, 2014
, was approximately
$15 million
.
In March 2014, JetBlue continued with its previously announced share repurchase program, repurchasing
1.6 million
shares of common stock on the open market structured pursuant to Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended, or Exchange Act. This repurchase plan was terminated on May 28, 2014. On May 29, 2014, JetBlue announced that it entered into an accelerated share repurchase, or ASR, agreement with JP Morgan paying
$60 million
for approximately
5.1 million
shares. JetBlue anticipates purchasing a total number of shares based on the volume weighted average prices of JetBlue's common stock during the term of the ASR, which is expected to be completed by the end of the third quarter of 2014. We may adjust or change our share repurchase practices based on market conditions and other alternatives.
NOTE 6 — EMPLOYEE RETIREMENT PLAN
We sponsor a retirement savings 401(k) defined contribution plan, or the Plan, covering all of our employees where we match employee contributions of up to
5%
of eligible wages. Our non-management employees receive a discretionary contribution of
5%
of eligible wages, which we refer to as
Retirement Plus.
They are also eligible to receive profit sharing, calculated as
15%
of adjusted pre-tax income and reduced by the
Retirement Plus
contributions and special items. Certain FAA-licensed employees receive an additional contribution of
3%
of eligible compensation, which we refer to as
Retirement Advantage.
Total 401(k) company match,
Retirement Plus,
profit sharing, and
Retirement Advantage
expensed for the
three months ended June 30, 2014
and
2013
was
$23 million
and
$20 million
, while total expensed for the Plan for the
six months ended
June 30, 2014
and
2013
was
$47 million
and
$41 million
, respectively.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
As of
June 30, 2014
, our firm aircraft orders consisted of
three
Airbus A320 aircraft,
46
Airbus A321 aircraft,
30
Airbus A320 new engine option (A320neo) aircraft,
30
Airbus A321neo aircraft,
24
EMBRAER 190 aircraft and
10
spare engines scheduled for delivery through
2022
. Committed expenditures for these aircraft and related flight equipment, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately
$310 million
for the remainder of
2014
,
$660 million
in
2015
,
$785 million
in
2016
,
$835 million
in
2017
,
$855 million
in
2018
and
$3.2 billion
thereafter. We are scheduled to receive
six
new Airbus A321 aircraft during the remainder of 2014,
one
of which has committed financing. We plan to purchase the remaining 2014 scheduled deliveries with cash.
Our aircraft lease agreements contain termination provisions which include standard maintenance and return conditions. Our policy is to record these lease return conditions when they are probable and the costs can be estimated.
As part of the sale of LiveTV (refer to Note 10) a
$3 million
liability relating to Airfone was assigned to JetBlue as part of the purchase agreement. Separately, prior to the sale of LiveTV, JetBlue had an agreement with ViaSat Inc. through 2020 relating to in-flight broadband connectivity technology on our aircraft. That agreement stipulated a
$20 million
minimum commitment for the connectivity service and a
$25 million
minimum commitment for the related hardware and software purchases. As part of the sale of LiveTV these commitments to ViaSat Inc. were assigned to LiveTV and JetBlue entered into two new service agreements with LiveTV pursuant to which LiveTV will provide in-flight entertainment and connectivity services to JetBlue for a minimum of
seven
years.
In 2012 we commenced construction on T5i, an expansion to our terminal at JFK, or T5, that we intend to use as an international arrival facility. An amendment of the original T5 lease was executed in 2013 to include this expansion, with JetBlue self-funding the construction cost of this facility with an expected total cost of
$195 million
. The construction is expected to be completed in late 2014, with total costs incurred through
June 30, 2014
of
$141 million
.
As of
June 30, 2014
, we have approximately
$33 million
in assets serving as collateral for letters of credit relating to a certain number of our leases. These are included in restricted cash and expire at the end of the related lease terms. Additionally, we had approximately
$25 million
pledged related to our workers compensation insurance policies and other business partner agreements, which will expire according to the terms of the related policies or agreements.
Environmental Liability
In 2012, during performance of required environmental testing, the presence of light non-aqueous phase petroleum liquid was discovered in certain subsurface monitoring wells on the property at JFK. Our lease with the Port Authority of New York and New Jersey, or PANYNJ, provides that under certain circumstances we may be responsible for investigating, delineating, and remediating such subsurface contamination, even if we are not necessarily the party that caused its release. We engaged environmental consultants to assess the extent of the contamination and assist us in determining steps to remediate it. A preliminary estimate indicated costs of remediation could range from
$1 million
up to approximately
$3 million
. As of
June 30, 2014
, we have accrued
$2 million
for current estimates of remediation costs, which is included in current liabilities on our condensed consolidated balance sheets. However, as with any environmental contamination, there is the possibility this contamination could be more extensive than estimated at this stage. We have a pollution insurance policy that protects us against these types of environmental liabilities, which we expect to mitigate some of our exposure in this matter.
Based upon information currently known to us, we do not expect these environmental proceedings to have a material adverse effect on our condensed consolidated balance sheets, results of operations, or cash flows. However, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or the costs of resolving the matter, in part because the scope of the remediation that may be required is not certain and environmental laws and regulations are subject to modification and changes in interpretation.
Legal Matters
Occasionally, we are involved in various claims, lawsuits, regulatory examinations, investigations and other legal matters arising, for the most part, in the ordinary course of business. The outcome of litigation and other legal matters is always uncertain. The Company believes it has valid defenses to the legal matters currently pending against it, is defending itself vigorously and has recorded accruals determined in accordance with U.S. GAAP, where appropriate. In making a determination regarding accruals, using available information, we evaluate the likelihood of an unfavorable outcome in legal or regulatory proceedings to which we are a party and record a loss contingency when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. These subjective determinations are based on the status of such legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to our consolidated results of operations, liquidity or financial condition.
To date, none of these types of litigation matters, most of which are typically covered by insurance, has had a material impact on our operations or financial condition. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by, or in excess of, our insurance coverage could materially adversely affect our financial condition or results of operations.
Employment Agreement Dispute.
In or around March 2010, attorneys representing a group of current and former pilots (the “Claimants”) filed a Request for Mediation with the American Arbitration Association (the “AAA”) concerning a dispute over the interpretation of a provision of their individual JetBlue Airways Corporation Employment Agreement for Pilots (“Employment Agreement”). In their Fourth Amended Arbitration Demand, dated June 8, 2012, the Claimants (
972
pilots) alleged that JetBlue breached the base salary provision of the Employment Agreement and sought back pay and related damages for pay adjustments that occurred in each of 2002, 2007 and 2009. The Claimants also asserted that JetBlue had violated numerous New York state labor laws. In July 2012, in response to JetBlue's partial motion to dismiss, the Claimants withdrew the 2002 claims. Following an arbitration hearing on the remaining claims, in May 2013, the arbitrator issued an interim decision on the contractual provisions of the Employment Agreement. The arbitrator determined that a
26.7%
base pay rate increase provided to certain pilots during 2007 triggered the base salary provision of the Employment Agreement. The 2009 claims and all New York state labor law claims were dismissed. In early July 2014, the AAA issued the arbitrator’s Final Award, awarding 318 of the 972 Claimants a total of approximately
$4.4 million
, including interest, from which applicable tax withholdings must be further deducted.
The Claimants have filed a motion to vacate the Final Award in New York Supreme Court. We believe the Claimants’ motion is without merit and expect the amount of damages awarded to the Claimants in the Final Award to be confirmed by the Court. We have accrued an amount that we believe is probable. Our estimate of reasonably possible losses in excess of the probable loss is not material. However, the outcome of any litigation is inherently uncertain and any final judgment may differ materially.
WestJet Complaint.
In December 2013, WestJet, a customer of LiveTV, filed a complaint against LiveTV alleging breach of contract. WestJet has alleged
$15 million
in damages plus unspecified damages for removing the inflight entertainment systems from its aircraft. In January 2014, LiveTV filed a response to this Complaint and a series of Counterclaims. LiveTV disputes the accuracy and validity of the WestJet claims and to the extent WestJet is able to establish any liability on the part of LiveTV, LiveTV contends that the as-yet unliquidated damages sought by LiveTV in its Counterclaims are likely to exceed any actual damages awarded to WestJet on its Complaint. We believe the Complaint to be without merit and will continue to assert defenses; however, as the case is in its early stages, it is not possible to assess the likelihood of loss. As part of the sale of LiveTV any damages to be paid or received have been assigned to JetBlue (refer to Note 10).
In April 2014, JetBlue pilots elected to be solely represented by the Air Line Pilots Association, or ALPA. The National Mediation Board, or NMB, certified ALPA as the representative body for JetBlue pilots and we plan to work with ALPA to reach our first collective bargaining agreement. We do not believe that the result of the election will have a material impact on our financial statements.
NOTE 8 —FINANCIAL DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
As part of our risk management techniques, we periodically purchase over the counter energy derivative instruments and enter into fixed forward price agreements, or FFPs, to manage our exposure to the effect of changes in the price of aircraft fuel. Prices for the underlying commodities have historically been highly correlated to aircraft fuel, making derivatives of them effective at providing short-term protection against sharp increases in average fuel prices. We also periodically enter into jet fuel basis swaps for the differential between heating oil and jet fuel, to further limit the variability in fuel prices at various locations.
To manage the variability of the cash flows associated with our variable rate debt, we have also entered into interest rate swaps. We do not hold or issue any derivative financial instruments for trading purposes.
Aircraft fuel derivatives
We attempt to obtain cash flow hedge accounting treatment for each aircraft fuel derivative that we enter into. This treatment is provided for under the
Derivatives and Hedging
topic of the Codification which allows for gains and losses on the effective portion of qualifying hedges to be deferred until the underlying planned jet fuel consumption occurs, rather than recognizing the gains and losses on these instruments into earnings during each period they are outstanding. The effective portion of realized aircraft fuel hedging derivative gains and losses is recognized in aircraft fuel expense in the period during which the underlying fuel is consumed.
Ineffectiveness results, in certain circumstances, when the change in the total fair value of the derivative instrument differs from the change in the value of our expected future cash outlays for the purchase of aircraft fuel and is recognized immediately in interest income and other. Likewise, if a hedge does not qualify for hedge accounting, the periodic changes in its fair value are recognized in the period of the change in interest income and other. When aircraft fuel is consumed and the related derivative contract settles, any gain or loss previously recorded in other comprehensive income is recognized in aircraft fuel expense. All cash flows related to our fuel hedging derivatives are classified as operating cash flows.
Our current approach to fuel hedging is to enter into hedges on a discretionary basis without a specific target of hedge percentage needs. We view our hedge portfolio as a form of insurance to help mitigate the impact of price volatility and protect us against severe spikes in oil prices, when possible.
The following table illustrates the approximate hedged percentages of our projected fuel usage by quarter as of
June 30, 2014
related to our outstanding fuel hedging contracts that were designated as cash flow hedges for accounting purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
Jet fuel swap
agreements
|
|
Jet fuel cap
agreements
|
|
Total
|
Third Quarter 2014
|
|
17
|
%
|
|
6
|
%
|
|
23
|
%
|
Fourth Quarter 2014
|
|
17
|
%
|
|
10
|
%
|
|
27
|
%
|
First Quarter 2015
|
|
10
|
%
|
|
—
|
%
|
|
10
|
%
|
Second Quarter 2015
|
|
9
|
%
|
|
—
|
%
|
|
9
|
%
|
Third Quarter 2015
|
|
5
|
%
|
|
—
|
%
|
|
5
|
%
|
Fourth Quarter 2015
|
|
5
|
%
|
|
—
|
%
|
|
5
|
%
|
In addition to the above jet fuel swaps and caps, JetBlue entered into jet fuel put options of
3%
for the third quarter of 2014 and
10%
for the fourth quarter of 2014.
During the second quarter of 2014 we entered into basis swap transactions that will settle later in 2014. These basis swaps have not been designated as cash flow hedges for accounting purposes and as a result are marked to market in earnings each period.
As of June 30, 2014
, the fair value recorded for these contracts was
not
material.
Interest rate swaps
The interest rate hedges we had outstanding as of
June 30, 2014
effectively swap floating rate debt for fixed rate debt, taking advantage of lower borrowing rates in existence at the time of the hedge transaction as compared to the date our original debt instruments were executed.
As of June 30, 2014
, we had
$51 million
in notional debt outstanding related to these swaps, which cover certain interest payments through August 2016. The notional amount decreases over time to match scheduled repayments of the related debt.
All of our outstanding interest rate swap contracts qualify as cash flow hedges in accordance with the
Derivatives and Hedging
topic of the Codification. Since all of the critical terms of our swap agreements match the debt to which they pertain,
there was no ineffectiveness relating to these interest rate swaps in
2014
or
2013
, and all related unrealized losses were deferred in accumulated other comprehensive loss. We recognized approximately
$1 million
in additional interest expense in the
six months ended June 30, 2014
, compared to
$5 million
in additional interest expense in the
six months ended June 30, 2013
.
The table below reflects quantitative information related to our derivative instruments and where these amounts are recorded in our financial statements (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(unaudited)
|
|
|
Fuel derivatives
|
|
|
|
Asset fair value recorded in prepaid expenses and other (1)
|
$
|
8
|
|
|
$
|
6
|
|
Asset fair value recorded in other long term assets (1)
|
2
|
|
|
—
|
|
Liability fair value recorded in other accrued liabilities (1)
|
1
|
|
|
—
|
|
Longest remaining term (months)
|
18
|
|
|
12
|
|
Hedged volume (barrels, in thousands)
|
2,605
|
|
|
1,320
|
|
Estimated amount of existing gains expected to be reclassified into earnings in the next 12 months
|
$
|
7
|
|
|
$
|
3
|
|
Interest rate derivatives
|
|
|
|
Liability fair value recorded in other long term liabilities (2)
|
$
|
2
|
|
|
$
|
3
|
|
Estimated amount of existing losses expected to be reclassified into earnings in the next 12 months
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
Fuel derivatives
|
|
|
|
|
|
|
|
Hedge effectiveness losses recognized in aircraft fuel expense
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
Losses on derivatives not qualifying for hedge accounting recognized in other expense
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Hedge ineffectiveness losses recognized in other income (expense)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hedge gains (losses) on derivatives recognized in comprehensive income
|
7
|
|
|
(18
|
)
|
|
3
|
|
|
(21
|
)
|
Percentage of actual consumption economically hedged
|
15
|
%
|
|
17
|
%
|
|
16
|
%
|
|
13
|
%
|
Interest rate derivatives
|
|
|
|
|
|
|
|
Hedge gains (losses) on derivatives recognized in comprehensive income
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Hedge losses on derivatives recognized in interest expense
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(5
|
)
|
____________________________
|
|
(1)
|
Gross asset or liability of each contract prior to consideration of offsetting positions with each counterparty.
|
|
|
(2)
|
Gross liability, prior to impact of collateral posted.
|
Any outstanding derivative instrument exposes us to credit loss in connection with our fuel contracts in the event of nonperformance by the counterparties to the agreements, but we do not expect that any of our
six
counterparties will fail to meet their obligations. The amount of such credit exposure is generally the fair value of our outstanding contracts for which we are in a receivable position. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position with each counterparty. Some of our agreements require cash deposits from either counterparty if market risk exposure exceeds a specified threshold amount.
We have master netting arrangements with our counterparties allowing us the right of offset to mitigate credit risk in derivative transactions. The financial derivative instrument agreements we have with our counterparties may require us to fund all, or a portion of, outstanding loss positions related to these contracts prior to their scheduled maturities. The amount of collateral posted, if any, is periodically adjusted based on the fair value of the hedge contracts. Our policy is to offset the liabilities represented by these contracts with any cash collateral paid to the counterparties.
The impact of offsetting derivative instruments is depicted below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount of Recognized
|
|
Gross Amount of Cash Collateral
|
|
Net Amount Presented
in Balance Sheet
|
|
Assets
|
|
Liabilities
|
|
Offset
|
|
Assets
|
|
Liabilities
|
As of June 30, 2014 (unaudited)
|
|
|
|
|
|
|
|
|
|
Fuel derivatives
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
1
|
|
Interest rate derivatives
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
Fuel derivatives
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Interest rate derivatives
|
—
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
NOTE 9 —FAIR VALUE OF FINANCIAL INSTRUMENTS
Under the
Fair Value Measurements and Disclosures
topic of the Codification, disclosures are required about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs as follows:
Level 1
quoted prices in active markets for identical assets or liabilities;
Level 2
quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3
unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a listing of our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of
June 30, 2014
and
December 31, 2013
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014
|
|
(unaudited)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
316
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
316
|
|
Available-for-sale investment securities
|
—
|
|
|
159
|
|
|
—
|
|
|
159
|
|
Aircraft fuel derivatives
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
$
|
316
|
|
|
$
|
169
|
|
|
$
|
—
|
|
|
$
|
485
|
|
Liabilities
|
|
|
|
|
|
|
|
Aircraft fuel derivatives
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest rate swap
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51
|
|
Available-for-sale investment securities
|
—
|
|
|
188
|
|
|
—
|
|
|
188
|
|
Aircraft fuel derivatives
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
$
|
51
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
245
|
|
Liabilities
|
|
|
|
|
|
|
|
Aircraft fuel derivatives
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Refer to Note 3 for fair value information related to our outstanding debt obligations as of
June 30, 2014
and
December 31, 2013
.
Cash equivalents
Our cash equivalents include money market securities which are readily convertible into cash, have maturities of 90 days or less when purchased and are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.
Available-for-sale investment securities
Included in our available-for-sale investment securities are time deposits and commercial papers with original maturities greater than 90 days but less than one year. The fair values of these instruments are based on observable inputs in non-active markets and are therefore classified as Level 2 in the hierarchy. We did
not
record any significant gains or losses on these securities during the
three and six months ended
June 30, 2013 and 2014.
Interest rate swaps
The fair values of our interest rate swaps are based on inputs received from the related counterparty, which are based on observable inputs for active swap indications in quoted markets for similar terms. The fair values of these instruments are based on observable inputs in non-active markets and are therefore classified as Level 2 in the hierarchy.
Aircraft fuel derivatives
Our aircraft fuel derivatives include jet fuel swaps, jet fuel caps, and jet fuel puts which are not traded on public exchanges. Their fair values are determined using a market approach based on inputs that are readily available from public markets for commodities and energy trading activities. Therefore, they are classified as Level 2 inputs. The data inputs are combined into quantitative models and processes to generate forward curves and volatilities related to the specific terms of the underlying hedge contracts.
NOTE 10 —LIVETV
LiveTV, LLC, formerly a wholly owned subsidiary of JetBlue, provides inflight entertainment and connectivity solutions for various commercial airlines, including JetBlue. On June 10, 2014, JetBlue entered into an amended and restated purchase agreement with Thales Holding Corporation, or Thales, replacing the original purchase agreement between the parties dated as of March 13, 2014. Under the terms of the amended and restated purchase agreement, JetBlue sold LiveTV to Thales for
$399 million
, subject to purchase adjustments based upon the amount of cash, indebtedness and working capital of LiveTV at the closing date of this transaction relative to a target amount. Excluded from this sale was LiveTV Satellite Communications, LLC which was retained by JetBlue pending receipt of the regulatory approvals necessary to sell LiveTV Satellite Communications, LLC. Under the amended agreement, once such approvals are received, JetBlue intends to sell LiveTV Satellite Communications, LLC to Thales for
$1 million
in cash.
The cash proceeds of
$391 million
reflect the agreed upon purchase price, net of purchase agreement adjustments. These proceeds relating to the sale resulted in a pre-tax gain on the sale of approximately
$241 million
and are net of approximately
$17 million
in transactions costs. The gain on the sale has been reported as a separate line item in the consolidated statement of operations for the three months and six months ended June 30, 2014. The agreement between JetBlue and Thales is subject to post-closing purchase price adjustments, which we expect to be finalized later this year.
The tax expense recorded in connection with this transaction totaled
$73 million
, net of a
$19 million
tax benefit related to the utilization of a capital loss carryforward. The capital gain generated from the sale of LiveTV resulted in the release of a valuation allowance related to the capital loss deferred tax asset. This resulted in an after tax gain on the sale of approximately
$168 million
.
Following the close of the sale on June 10, 2014, LiveTV operations are no longer being consolidated as a subsidiary in JetBlue's condensed consolidated financial statements. The effect of this reporting structure change is not material to the financial statements presented for the period ended June 30, 2014.
JetBlue expects to continue to be a significant customer of LiveTV and concurrent with the sale the parties have entered into two agreements with
seven
year terms pursuant to which LiveTV will continue to provide JetBlue with inflight entertainment and onboard connectivity products and services.